said 'that the policy expires with the transfer of the estate, so far as it relates to the original holder; but the assignment and consent of the company constitute an independent contract with the assignee, the same in effect as if the policy had been reissued upon terms and conditions therein expressed. . . . The contract of insurance thus consummated arises directly between the purchaser and the insurance company, to all intents and purposes the same as if a new policy had been issued, embracing the terms of the old. In such a case no defense predicated on the supposed violations of conditions of the policy by the assignor will be available against the assignee.'"'6

Pledging of Policy as Collateral Security not Prohibited by Assignment Clause.-Unless provided in the policy to the contrary, it is the general rule that a pledging of the policy as collateral security will not invalidate the contract, even though this may have been done without the company's knowledge or consent. The assignor continues in this case to be the owner of the property and is still the insured, although the assignee has a lien on the proceeds of the insurance which will protect him in preference to other creditors. As Richards summarizes the proposition: 7

"Where the policy has been transferred as collateral security either with or without the consent of the insurer, the assignee may be merely an appointee or payee to receive any insurance money to the extent of the debt. In such a case it is not necessary that he should show any title or insurable interest in the property itself. An equitable assignee of the proceeds of insurance, if any, need have no interest in the property itself."

Ostrander on "Fire Insurance," pp. 502, 503. This decision represents the great weight of authority, although there are some decisions to the contrary.

'Richards: "Treatise on the Law of Insurance," p. 354.

Assignment After the Occurrence of a Loss.-A clear distinction must be made between the policy and the proceeds obtained on the same after a fire has caused a loss. The policy itself cannot be assigned without the company's consent, but a claim for loss or damage may be thus assigned. Again quoting Richards: 8

"After a loss by fire has occurred, the claim of the assured for damages is a chose in action, which he has a right to assign in spite of this clause, without asking permission of the company, and the assignee then takes, subject to all defenses available to the insurer as against the assignor. But any excess of insurance over and above the fire loss still belongs to the assured assignor, and he can no more assign the policy as to that without consent than he could do so before the fire.'

CHAPTER IV

THE MORTGAGEE CLAUSE

Mortgagee and Mortgagor Have Separate Insurable Interests. One of the most common cases where more than one party has an insurable interest in the same property arises in connection with the mortgagee's interest.1 The courts fully recognize the principle that both mortgagor and mortgagee possess an interest in the' mortgaged property which each may insure separately, without violating the policy provision against double insurance. The mortgagor, as owner of the property, may insure the same to the extent of its value, and the mortgagee, as creditor, may effect insurance to the extent of his interest. Both parties may secure insurance without consulting each other, or without giving notice to or receiving the consent of the other insurer. In brief, the courts regard the two insurances as covering separate insurable interests, and hold that where the mortgagee has taken out a policy in his own name and pays the premium, the mortgagor is to be considered a stranger to the contract.

At least five methods are available to protect the mortgagee's interest. Some of these have proved very

The reader's attention is called to the article by Robert Riegel on "Protection of a Mortgagee's Interest in Real Property by Insurance." Journal of Political Economy, Volume 33, December, 1915.

deficient from the viewpoint of the mortgagee's protection, and it is owing chiefly to these deficiencies that the so-called "mortgagee clause" has had its origin. five methods referred to are:

The

The Mortgagee May Insure His Own Interest.—When the mortgagee insures his interest in his own name, the mortgagor in no way has an interest in the benefits derived from the insurance and the indemnity paid cannot be applied to the payment of the mortgage debt. Now if the mortgagor is not relieved from his debt and the mortgagee is entitled to the proceeds of his policy, it would seem that the mortgagee might receive two payments for one debt. This would manifestly be contrary to justice, and would give rise to fraud.

To avoid such double payments, it is a well-established legal principle that upon the payment of a loss to the mortgagee the insurer becomes subrogated to the mortgage or other evidence of debt, i.c., becomes entiled to all the rights which the mortgagee had in the mortgage. If the insurer, now the holder of the mortgage, can collect the same when it matures, he will be reimbursed. But in case this cannot be done, the insurer and not the mortgagee will be the loser. If the loss is less than the sum to which the mortgagee is entitled, the company is subrogated to the right to collect the loss, but in this case it should be noted that the company's rights are subordinate to those of the mortgagee. If, after a loss has been paid, there still remains a portion of the property, the company cannot prejudice the mortgagee's right to this security and the collection of the balance of the debt. The company is subrogated to so much of the mortgage as it has paid, and is only entitled to such portion of the remaining property as will not be needed to protect the mortgagee's interest in the balance of the debt not yet paid.

Two methods of settling a loss present themselves when the mortgagee has insured his own interest. Thus let us assume that "M" (the mortgagee) holds a mortgage of $10,000 on "X's" (the mortgagor's) property, valued at $12,000, and has insured his interest in Company "Y." Assume also that a loss of $9,000 occurs. Under one method of settlement, and by far the most commonly used, Company Y pays M the full $10,000 and becomes subrogated to that amount. Under another method, Company Y pays M the amount of the loss ($9,000) and becomes subrogated to M's right to collect that sum from X at the maturity of the mortgage. M, however, retains the right to collect the balance due ($1,000), and may not be prejudiced by Company Y in this respect. Should Y succeed in collecting the $9,000 from X, it will have been fully reimbursed for the loss paid to M. Should it happen, however, that foreclosure becomes necessary and that the property sells for less than is required to meet Company Y's claim for $9,000, and M's balance due for $1,000, Company Y must be the loser.

Instances of insurance by the mortgagee in his own name are comparatively rare. This method affords full protection to the mortgagee, it is true, and may be utilized where he lacks confidence in the mortgagor's policy and thus desires insurance of his own choosing. But as opposed to this, there is the disadvantage to the mortgagee of paying the premium. The insurer, likewise, dislikes the method, because of the difficulty of supervising the risk and the possibility of fraudulent collusion between mortgagor and mortgagee.

Mortgagee May Take the Mortgagor's Policy by Way of Assignment.-While the mortgagee's interest may be insured directly and separately, it is the desire of the insurer to avoid this wherever possible. Companies much prefer to issue the policy in the name of the owner,